Earnings Drive Businesses, But Expectations Drive Stock Prices

by Brian Luster

If you’ve ever been to the track, you know that big winnings come from betting against the crowd.

Bet on the favorites and you may cash in a couple of small winning tickets; but scope out an underdog the crowd doesn’t believe can win and you collect a big payoff. There simply isn’t much reward in betting with the consensus.

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The same holds true in the investing universe. To be consistently successful, you must adopt a contrarian’s mentality and bet against the crowd. There are a host of good businesses out there—even a lot of great businesses—you might invest in, but if you want substantial returns, you have to place less emphasis on the prospects for the business, and more on the prospects for the investment.

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